Here are some things I think I am thinking about:
1) The NBA Gambling Scandal and Liability Matching
The NBA is embroiled in a huge gambling scandal. It’s not at all surprising. What’s actually surprising is that anyone got caught. As soon as sports gambling was widely approved it became hard to see how they would police it. For example, if Lebron James wants to make a few extra thousand dollars on a prop bet for exactly 2 turnovers in the 3rd quarter then who’s going to prove he was involved in that? Maybe not the best example, but these prop bets are so opaque and nearly impossible to trace that you could intelligently implement them where the dollar sizes were small enough that they become a money printer. Make sure you lose every so often and you create a nearly guaranteed stream of income.
I am a big time free markets person. And despite being a pretty strict dad I try not to police every aspect of life around me.1 I think people should be allowed to wear their big boy pants and make big boy decisions. If you want to play a loser’s game like roulette then you should be allowed to do that knowing that you’re more likely to lose than win. People should be allowed to do things that are not necessarily good for them as long as they understand those things are bad. And to be clear, I think gambling is bad. Really bad. And I understand why people do it because I know why I used to do it. There’s that allure of being the outlier who wins big and suddenly all your liabilities become insignificant with seemingly no effort. But that’s the thing – gambling is the wrong way to right a liability problem. Heck, you can barely control your assets in a public market even though we know they’re positive sum games so once you dive into the world of negative sum games (like gambling) then you’re really rolling the dice (see what I did there?).
And that’s the thing about the NBA that’s kinda crazy. These are people who are (or should be) multi-millionaires. The problem is, athletes tend to have a very strange asset-liability mismatch across time. Most of us start poor and get increasingly wealthy with time. At the same time, our liabilities start relatively high and typically end up being relatively low. In other words, as your balance sheet grows your needs typically don’t expand proportionally (or you get old and grumpy like me and start hating all your physical belongings). Young people need the income to spend on college, kids and houses and don’t have it. And old people have the income and houses, but don’t have the kids and college to pay for (well, until your kids ask you to pay for their kids). The point is, for most of us, our asset-liability mismatch improves with time as life becomes more uncertain (ie, you get closer to dying). But for pro athletes it is often the opposite. They get money thrown at them at a young age and the sums are so disproportionately huge that they go overboard with it. So they have a backwards mismatch where their income is front-loaded in such a disproportionate way that it can cause huge problems on the back-end if the assets aren’t managed well as the income declines and the spending often remains either the same or increases. So, as their life becomes more uncertain as they get older their liabilities often remain high at the same time their income is declining. That’s why the bankruptcy rate for pro athletes is so high.
The real point is, you can’t asset allocate your way out of an unsustainable liability problem. If you are spending uncontrollably then your assets cannot fix that mismatch. Saving and investing is a good way to allocate assets and help manage an asset-liability mismatch, but gambling will almost certainly make your asset-liability mismatch worse. And most importantly, you have to get the liabilities under control even if you have a perfectly sound asset allocation in place. I talk a lot about asset allocation here and not enough about liability allocation, but it’s the liabilities that we can really control and if they’re not controlled well they will leave you in a place of desperation. A place where you’re making prop bets on Lebron James turning the ball over, except you probably aren’t the one with insider information about how it turns out.
2) 5X ETFs! Why not 10X ETFs?
Sadly, this is not the only place where we’re seeing this devolution of activity. It is, after all, happening across public markets as well. Dave Nadig wrote the best thing I read this week about 5X ETFs. Dave is brilliant on these topics and if you don’t follow his work you really should.
I know speculation in public markets has always been a thing. In fact it was arguably worse during the depression when there were almost no rules on anything. But I had come to believe that public markets were becoming more of an adulting atmosphere where people mostly allocated their savings wisely and firms issued instruments to raise capital.2 But it seems like that’s not what public markets are so much anymore. Fewer firms are going public and that get-rich-quick mentality is just too strong for both the issuers and the gamblers to ignore. And I get it. If there’s a buck to be legally made then try to make the buck. But the dad in me is sitting here watching this thinking “it’s gonna blow up in your face so I am not going to lecture you about it because you’ll learn your lesson when you get your face ripped off“. Of course, here I am lecturing everyone on it. Don’t buy these things. They’re bad.
Anyhow, I am really dating myself here, but it all reminds me of the old mach 20 razor skit where they invent the Mach 20 razor to replace the Mach 3 and it cuts the man’s face off. It’s still hilarious. And it’s a great analogy because the more razors we add to these leveraged ETFs the more dangerous this all gets. I don’t know if it’s a sign of where we are in the short-term market cycle or what, but none of it feels right to me.
I’ve ranted about this before so I’ll stop screaming at clouds now. Thanks for listening.
3) Speaking of Discipline….
I am having a hard time keeping my mouth shut because we have a bunch of special announcements coming in the next few weeks. With all the craziness in the markets I am super excited about what we’re about to unveil, but the timing is not quite right yet. So stay tuned. Until then, have a great weekend and as always, stay disciplined.
1 – Who am I kidding? I am basically a money printer for my daughters. I CAN’T HELP IT. THEY ARE VERY CUTE.
2 – I actually know better. Markets might change, but human behavior never does.